Cameron is wrong: the public finances are better than we thought

Yes the Budget deficit is dire, but the Prime Minister is being disingenuous at best in claiming that it is “worse than we thought”, as he has done in Milton Keynes today. If anything, it is actually a bit better than previously thought.

Let's examine David Cameron’s evidence for his claim that matters are more serious than previously understood. His datapoint is that Treasury estimates show that Government debt interest is heading towards £70bn in the next five years. Here is the key quote:

Based on the calculations of the last government, in five years’ time the interest we are paying on our debt is predicted to be around £70bn. That is a simply staggering amount.

No wonder the previous government refused to publish the information. Let me explain what it means. Today we spend more on debt interest than we do on running schools in England. But £70bn means spending more on debt interest than we currently do on running schools in England plus climate change plus transport.

Interest payments of £70bn mean that for every single pound you pay in tax, 10 pence would be spent on interest.

Now, if this really is news to the Prime Minister, I am quite dumbfounded. For it is no secret that the Treasury has been making these calculations and publishing them privately for months, if not years. How do I know? Because I wrote a story on precisely this a day or so after the final Labour Budget in March.
The story said: “based on Treasury figures in the Budget, debt interest payments will climb to £73.8bn by 2014/15. At this level – 10.6pc of total tax revenues – debt interest payments would be at the highest level since the 1980s, when Nigel Lawson was still gradually reducing the scale of Britain’s national debt.”

True, the figures had to be calculated by proxy by the Institute for Fiscal Studies because the Treasury doesn’t habitually publish debt interest forecasts into the future, but Cameron is simply wrong: the public finances do not look any worse than under Labour. Ironically, the Tories actually had sight of some of these private calculations a year or so ago and leaked them to the press, so even if Cameron is merely neglecting to read the papers, he surely cannot claim that he had no inkling of what he was facing.

While they may not be new, the figures nonetheless look horrible of course: when your debt interest payments get over 10p in every pound of tax revenue collected, that’s usually the moment where the ratings agencies start to reconsider your triple-A rating.

But if anything the picture has actually improved in recent weeks. For one thing, the latest public finances numbers show that Britain’s deficit last year was actually considerably lower than previously calculated. For another, the interest rate on the average 10-year gilt has actually fallen considerably since the eurozone economic crisis took hold. Both of these factors are reasonably encouraging. They support the argument that one has to provide decent, credible plans to cut the deficit, since in Britain’s case that is precisely what the markets are recognising, by charging the Government a lower rate of interest.

So why does Cameron feel it necessary to use scare tactics instead? One presumes it’s because he’s aware of the political difficulty of imposing those cuts. Canada may have done pretty well in cutting its spending, but the process was extremely gruelling. Perhaps Cameron is still haunted by Mervyn King’s reported warning that the austerity that the election-winner would have to impose could make them so unpopular that they would ultimately find themselves ejected from power. But whatever his rationale, he has no excuse for misrepresenting economic reality.